Parisian Cosmetics Company is planning a one-month campaign for September to pro
ID: 2582231 • Letter: P
Question
Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of $140,000 has been budgeted for advertising, contests, redeemable coupons, and other promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign:
No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 22,000 additional units of moisturizer or 20,000 additional units of perfume could be sold from the campaign without changing the unit selling price of either product.
Differential Analysis
Promote Moisturizer (Alternative 1) or Promote Perfume (Alternative 2)
August 21
1
Promote Moisturizer
Promote Perfume
Differential Effect on Income
2
(Alternative 1)
(Alternative 2)
(Alternative 2)
3
4
5
6
7
8
9
10
2. Determine whether to promote moisturizer (Alternative 1) or promote perfume (Alternative 2).
A. Promote perfume.
B. Promote moisturizer.
C. The company is indifferent since the result is the same regardless of which alternative is chosen.
3. The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by $80,000 ($11 operating income per unit for 20,000 units, less promotion expenses of $140,000). The manager also believed that the selection of moisturizer would reduce operating income by $8,000 ($6 operating income per unit for 22,000 units, less promotion expenses of $140,000). State briefly your reasons for supporting or opposing the tentative decision.
The sales manager’s tentative decision should be_(accepted/opposed)____ . The sales manager_(erroneously/correctly)____ considered the full unit costs instead of the differential (additional) revenue and differential (additional) costs. An analysis similar to that presented in part (1) would lead to the selection of_perfume/moisturizor_____ for the promotional campaign because this alternative will contribute_(less/more)____ to operating income than would be contributed by promoting_perfume/moisturizor_______.
Moisturizer Perfume Unit selling price $55 $60 Unit production costs: Direct materials $ 9 $14 Direct labor 3 5 Variable factory overhead 3 5 Fixed factory overhead 6 4 Total unit production costs $21 $28 Unit variable selling expenses 16 15 Unit fixed selling expenses 12 6 Total unit costs $49 $49 Operating income per unit $ 6 $11Explanation / Answer
1. Differential Analysis Report
a. Fixed cost is not considered for differencial analysis. Assume Fixed cost will absorbed regular unit. Additional Unit will not absorbed it.
b. Additional unit will aborsed only veriable cost require for production and selling and distribution.
2. From above analysis it is showing that promoting Moisturizer is more benificial than Perfume
3. The sales manager’s tentative decision should be_opposed_ . The sales manager_erroneously_ considered the full unit costs instead of the differential (additional) revenue and differential (additional) costs. An analysis similar to that presented in part (1) would lead to the selection of_moisturizor_ for the promotional campaign because this alternative will contribute_more_ to operating income than would be contributed by promoting_perfume_.
Differential Analysis Report Moisturizer Perfume Additional Unit Sales 22,000 20,000 Unit production costs: Direct materials 9 14 Direct labor 3 5 Variable factory overhead 3 5 Total unit production costs 15 24 Unit variable selling expenses 16 15 Total unit costs 31 39 Total unit Cost * additional unit 6,82,000 7,80,000 Additional Cost of Advertisement 1,40,000 1,40,000 Additional Revenue 5,42,000 6,40,000